Now that Ocwen Financial (OCN) is beginning to put the threat of losing its California mortgage license into the rear-view mirror, analysts are beginning to weigh in on the impact of the new sanctions against the battered nonbank.
For investors in the residential mortgage-backed securities that contain Ocwen-serviced loans, the impact of the California settlement will be felt, but nowhere nearly as deeply as if Ocwen’s punishment was more severe.
In fact, analysts from Moody’s Investors Service say that the California settlement will be “credit neutral” for the RMBS transactions holding Ocwen-serviced loans.
Under the terms of the settlement between Ocwen and California, Ocwen must pay a $2.5 million fine to California. Ocwen is also prohibited from acquiring any additional mortgage servicing rights for loans in California until the California Department of Business Oversight is “satisfied that (Ocwen-subsidiary) Ocwen Loan Servicing can satisfactorily respond to the requests for information and documentation made in the course of a regulatory exam.”
According to the report from Moody’s analysts Gene Berman and Mark Branton, the fact that Ocwen is prohibited from acquiring new MSRs in California is actually a credit positive for Ocwen RMBS transactions because it will force Ocwen to focus on servicing its existing portfolio of loans.
Additionally, the fact that Ocwen will not be immediately forced to liquidate its California loan portfolio is a positive as well.
“The state’s agreement to withdraw its suspension request minimizes the probability that the CDBO will force Ocwen to transfer to other servicers the $94 billion of loans in California that it services,” the analysts said.
“A forced servicing transfer would likely result in increased trust losses and large-scale cash flow disruptions for RMBS holding Ocwen-serviced California loans, both of which are credit negative,” the analyst added. “Cash-flow disruptions include increased liquidation timelines, which extend junior interest payments at the expense of senior principal, and a higher probability of interest shortfalls owing to servicer advance recoupment.”
On the other hand, Moody’s analysts expect the California settlement to have some negative effects on the Ocwen’s loans as well, including elevated foreclosure timelines and increased servicing costs.
“Transactions with high California concentrations will continue to face elevated foreclosure timelines,” the analysts said. “Extended foreclosure timelines reduce recoveries on liquidated loans through additional costs that accrue during the foreclosure process, including principal and interest advances, legal fees, property insurance, taxes and maintenance. However, the negative credit impact of increased foreclosure timelines would be far lower than if the CDBO forced Ocwen to transfer its servicing portfolio.”
Under the terms of the California agreement, the CDBO will also choose an independent third-party auditor, who will be tasked with assessing Ocwen Loan Servicing’s compliance with laws and regulations impacting California borrowers for a period of at least two years.
The auditor’s examination of Ocwen’s compliance may be extended “at the discretion of the CDBO,” Ocwen’s SEC filing states. Also, Ocwen is required to pay “all reasonable and necessary costs” for the auditor.
Those costs and the fine Ocwen must pay will impact Ocwen-related RMBS transactions as well.
“Furthermore, Ocwen will have to adopt corrective plans to address any shortcoming in servicing practices the auditor identifies,” the analysts note. “Ocwen will also pay the DBO’s expenses associated with the DBO's filing to suspend Ocwen's license, expenses related to the DBO’s review of the documents Ocwen provides, and any other expenses associated with the consent order.”